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We’re once again suffering a bout of stock market indigestion–hardly surprising after a robust two-year market rally. We’ve enjoyed healthy returns since October 2022. Now it’s time for a taste of risk. Indeed, today, the Nikkei Stock Average fell 12.4%, its worst one-day performance since 1987.
No doubt market pundits will start focusing intently on what the Federal Reserve will do in September, and whether indications of economic weakness will result in a larger-than-anticipated interest rate cut. The good news: With short-term rates so high, the Fed has plenty of fire power.
My question for my fellow HumbleDollar denizens: What do you say to yourself at times like this to keep yourself invested in the stock market? Perhaps your mantra or mantras might help your fellow readers.
I’m late to this post but after Friday 8/9 we’re basically back to where markets were before Mondays rout!
My retirement portfolio is invested/ managed in various strategies and instruments through my Financial Advisor that I can’t easily change. I am comfortable with this arrangement and my asset allocation and really don’t worry about short term blips in equity markets. Knowing there is nothing I can/ need to do removes the emotional response some might have in volatile markets.
Easy, keep investing. There is a story on a young boy asking the great financiier JP Morgan what the market was going to do. His reply:”fluctuate, my dear boy.’
I keep this list of “on average” expected market declines posted above my computer:
-5% 3 times per year
-10% every year
-15% every 4 years
-20% every 6 years
-30% every 18 years
And when making decisions always ask myself: “Am I invested in such a manner that I will be financially and emotionally OK during these events?”
Warren Buffet keeps billions of dollars in cash when he can’t find worthy investments selling at reasonable prices. He doesn’t seek to be fully invested at all times.
But when the market drops and share prices decline, he’s “like a kid in a candy store” scooping up the shares of good companies selling at bargain prices.
My mantra: If it’s good enough for Warren, it’s good enough for me.
A fun mantra I suppose, but in reality what Warren does with Berkshire Hathaway’s money is of little relevance to me (except as a shareholder). Warren and his team’s resources and skill in doing what you describe is far superior to mine, and Berkshire’s investing horizon is far longer than mine, or that of anyone here.
I think the lesson we can take from observing Warren Buffet is that it’s okay to set some cash aside when asset prices are high, and wait for a time to invest when assets are priced at more reasonable levels. You don’t need to be fully invested at all times to earn a healthy long-term return.
Isn’t this the same behavior as rebalancing when markets have risen significantly, moving funds from stocks to bonds (or cash); then moving funds from bonds/cash to stocks when stock prices are lower?
Of course that’s okay if that how one wants to invest. There are pros and cons to this, as the comments right below ours allude to.
Re your question, no, I don’t think it is the same.
Rebalancing implies the investor has decided on a target asset allocation, and when that allocation is out of whack by whatever measure the investor chooses, they sell and buy as needed to return to their target allocation. In this case, the cash allocation is what it is because the investor has decided that’s what they want, not holding dry powder because they “can’t find worthy investments.”
One works for me and one works for Berkshire, as well as of course for some individual investors. But to my point, Berkshire and I are such different investors that I don’t see their practices as something to do myself. I’d rather set an allocation and rebalance as needed.
I see stock market declines as an opportunity to buy. I keep cash available for such occasions and if it declines more, I buy more.
While this approach is embraced by many investors, I’ve yet to see convincing evidence of its effectiveness. The argument against this approach is that cash set aside until a selloff is money that is missing out on market gains until there is a downturn.
You’re right from a pure return point of view — you should indeed skip the cash and stay fully invested in stocks. But I could also see that the chance to do some buying during a downturn might help from a behavioral standpoint, allowing investors to do something sensible during a stock market decline that will perhaps take some of the sting out of their short-term losses.